eTrade 2012 Annual Report Download - page 149

Fair Value Hedges
Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair
value of the asset or liability being hedged on the consolidated balance sheet. Changes in the fair value of both
the derivatives and the underlying assets or liabilities are recognized in the gains on loans and securities, net line
item in the consolidated statement of income (loss). To the extent that the hedge is ineffective, the changes in the
fair values will not offset and the difference, or hedge ineffectiveness, is reflected in the gains on loans and
securities, net line item in the consolidated statement of income (loss).
Hedge accounting is discontinued for fair value hedges if a derivative instrument is sold, terminated or
otherwise de-designated. If fair value hedge accounting is discontinued, the previously hedged item is no longer
adjusted for changes in fair value through the consolidated statement of income (loss) and the cumulative net
gain or loss on the hedged asset or liability at the time of de-designation is amortized to interest income or
interest expense using the effective interest method over the expected remaining life of the hedged item. Changes
in the fair value of the derivative instruments after de-designation of fair value hedge accounting are recorded in
the gains on loans and securities, net line item in the consolidated statement of income (loss).
The following table summarizes the effect of interest rate contracts designated and qualifying as hedging
instruments in fair value hedges and related hedged items on the consolidated statement of income (loss) for the
years ended December 31, 2012, 2011 and 2010 (dollars in thousands):
Year Ended December 31,
2012 2011
Hedging
Instrument
Hedged
Item
Hedge
Ineffectiveness(1)
Hedging
Instrument
Hedged
Item
Hedge
Ineffectiveness(1)
Agency debentures $(17,831) $ 16,367 $(1,464) $(144,968) $142,242 $(2,726)
Agency mortgage-backed
securities (7,303) 6,745 (558) (51,557) 48,835 (2,722)
FHLB advances 14,146 (18,824) (4,678) 52,658 (49,109) 3,549
Total gains (losses)
included in earnings $(10,988) $ 4,288 $(6,700) $(143,867) $141,968 $(1,899)
Year Ended December 31,
2010
Hedging
Instrument
Hedged
Item
Hedge
Ineffectiveness(1)
U.S. Treasury securities and
agency debentures $ 55,743 $(57,816) $(2,073)
FHLB advances (18,099) 19,456 1,357
Corporate debt (1,714) 1,714 —
Total gains (losses)
included in earnings $ 35,930 $(36,646) $ (716)
(1) Reflected in the gains on loans and securities, net line item on the consolidated statement of income (loss).
Credit Risk
Impact on Fair Value Measurements
Credit risk is an element of the recurring fair value measurements for certain assets and liabilities, including
derivative instruments. Credit risk is managed by limiting activity to approved counterparties and setting
aggregate exposure limits for each approved counterparty. The Company also monitors collateral requirements
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